Determinants of Information Technology Outsourcing Among Health Maintenance Organizations

We extend transaction cost economics by examining the effect of relaxing two of its underlying assumptions. First, transaction cost economics relies on an assumption of risk neutrality. We argue that organizations transactions vary in the risk they impose on an organization and that organizations are more likely to embed riskier transactions within a hierarchy. Second, transaction cost economics assumes that transactions are independently organized. We argue that organizations have an underlying propensity to organize transactions through hierarchy or contracting and that this underlying propensity is related to an organization’s capabilities, such as absorptive capacity. The analysis shows that transaction organization is a function of transaction risk. Transaction risk, rather than uncertainty or firm asset specificity, is the most important factor determining transaction organization. And, the analysis shows that transaction organization is a function of an organization’s absorptive capacity and technological diversity. This means that transactions within an organization are interdependent.